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Environmental Risk
2 Environmental Risk John Roberts and Frank Frantisak
Environmental risks arise from the relationships of corporations with the natural environment and with the entities that regulate, protect, and manage the environment. Sources of environmental risk include energy use and its effects, greenhouse gas emissions, water use and discharges, waste disposal, site contamination, and effects on biodiversity. Many corporate activities, such as manufacturing, mining, importing new materials, and selling automobiles, are the subject of environmental regulations developed to protect the environment. There is considerable risk in not achieving compliance with their requirements. Environmental risks can be viewed through a social risk lens, and vice versa. Social risks arise when people react to corporate effects, whether actual or perceived, on the environment. The usual public reaction to industrial effects on the environment is ambivalence. But some effects, actual, proposed or perceived, can incite people to outrage, demonstrations, letters to the editor, boycotts, media campaigns, complaints to government officials, and lawsuits. Many such complaints will lead to investigations and even charges. There is political risk (see Chapter 15 on Political Risk), for companies can lose the support of political friends and elected officials such as a mayor or governor and even lose the support of industry groups. A company could wind up with disgruntled employees or have difficulty attracting employees because of its poor environmental reputation. This general sullying of personal and corporate reputations can affect a company’s brand (see Chapter 8 on Brand Risk) and can have serious personal effects on managers who might be implicated.
Environmental Risks—the Social Dimension Why do some members of the public get upset about environmental risks that experts are not concerned about? People often distrust experts, especially when they disagree with one another, and with good reason: In many high-profile cases, the experts have been wrong. Experts claimed PCBs1 were inert and stable and thus ideal for use in electrical equipment. Years later, it was found they accumulate up the food chain and are persistent in nature. The U.S. Environmental Protection Agency describes their many toxic effects on humans and animals.2 CFCs3 were introduced because of their firefighting properties and because experts said that they were less dangerous than ammonia for refrigeration and air conditioning. After many years of use, it was discovered that they were burning a hole in the ozone layer of the atmosphere over Antarctica. Governments around the world have banned both chemicals. 17
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People’s reaction to environmental risk is strongly driven by the control (or lack thereof ) that they can exert over the source of risk. People are more likely to get outraged if they feel that the company gets all the profits from taking a risk and the people get all the consequences—with little or no say in how the risk will be managed. And not only exotic chemicals provoke this reaction: There were, and still are, major campaigns lead by public interest groups against forestry, energy, and mining operations. Some “outraged” people live near these operations, but many more are not directly affected. Their outrage is often driven by broader concerns about the environment. In 2005, TransCanada Corporation proposed the Keystone XL pipeline expansion, a 327-mile shortcut between existing pipelines that would shorten the distance between Canada’s oil sands and the U.S. Gulf Coast refineries. Well-known climate scientists, environmental groups, newspapers, and celebrities opposed the project on environmental and climate grounds. Protests drew tens of thousands of people. The CEO of TransCanada called the pipeline “routine,” saying that the company had been building pipelines for more than half a century and that 200,000 miles of similar pipeline already existed in the United States.4 Yet at the time of writing, the project was still in limbo, with President Obama deferring a decision indefinitely. When determining the consequences of environmental risks, you should determine the potential for community “outrage,”5 because it is capable of halting a project or exaggerating a technically minor incident or project proposal. People often find many environmental effects outrageous even when technically informed people—experts—performing risk assessments judge the mechanical, physical or chemical or biological risks to be minimal. Thus environmental risks and social reaction to them must be considered together. Consider the following example. Some of the world’s best wood fiber for papermaking is made by a chemical process called the Kraft process. The Kraft pulp process emits a strong, pungent odor similar to that of rotten eggs. Though the smell is unpleasant, there are no known health effects at the usual concentrations. At a Kraft pulp mill in Thurso, Quebec, the odor had been prevalent for many years. The mill had been in the town for several decades, and many employees were residents of the town. Because of this, and perhaps because the nose becomes somewhat accustomed to the odor, this situation had been more or less tolerated over the years. In the late 1980s and 1990s, the number of odor complaints increased. In addition, when there was an easterly wind, the odor would waft into downtown Ottawa, about 30 kilometers away, increasing the complaint halo. The managers of the mill did nothing for a while, as was often the case at that time. They believed the mill to be an important economic contributor to the community—and, in any case, it was not affecting public health. But complaints became increasingly frequent and vociferous. National political leaders in Ottawa joined in the fray. Eventually, to keep the peace, the company was obliged to implement a project in excess of $20 million to remove 90 percent of the odor. The complaints went away. To preserve the company’s reputation, the company’s board of directors had approved a zero-financial return project at a time when the pulp industry, and that mill, were not doing well.
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Environmental Risk—the Legal Dimension To ensure adherence to protection measures demanded by society, and to ensure that all actors are guided by the same standard, governments establish laws and regulations carrying financial sanctions for companies and personal sanctions for managers. Though fines and financial measures are criticized by some because they can be seen as a cost of doing business, personal charges against managers and directors are a different matter and necessitate clear actions by the directing minds of corporations. To protect their companies and themselves from prosecution directors and managers must install meaningful environmental policies that are implemented through an environmental management system. Then they must regularly follow up to ensure, through oversight visits and formal audits, that the system is working. In this manner, they will be preventing mishaps and will have a defense of due diligence in the event of mishap. In the authors’ experience, environmental charges laid against companies can have significant financial and legal implications. In the 1990s, a paper mill (we’ll call it Mill 1) was charged with multiple contraventions of the effluent discharge regulations, and the mill manager was personally charged with many counts related to the same discharge contraventions. Potential fines for the charges amounted to $160 million, though legal precedent indicated clearly that fines were likely to be no more than $5 million—still a notable sum. The mill had had a history of overflows of untreated effluent from the mill sewer system during the previous several years. This had attracted the attention of the corporate environment department, which had been monitoring the mill’s environmental compliance data every month and the mill had been through the regular corporate environmental audit program. The factors causing the overflows had been identified as risks of these processes. Risk management and reduction programs and projects were implemented, in response to the audit, to deal with the overflow situation. Overflow frequency had been greatly reduced over the prior two or three years and were rare at the time when the charges were laid. Nevertheless, the regulators laid charges for violations in previous years. In the words of one senior manager, “with that many charges, chances are we are guilty of something.” Hence, the legal strategy was to have the charges against the mill manager dropped, and reduce the penalties to the corporation, by pleading guilty to a reduced number of infractions. Ultimately both of these objectives were achieved, and a modest fine was paid. The lesson is that even though the risk of environmental harm can be identified and effectively reduced by risk assessment, oversight, auditing, and follow-up, past regulatory violations may be on the record, creating enhanced legal risk until the statute of limitations has run. There is a personal side to this, too, for despite the best intentions of the company, the episode took a considerable personal toll on the mill manager and his family. Companies need, first and foremost, to ensure that they are in compliance with the rules and avoid charges. But in the case of charges, it is critical to consider very carefully how best to support and assist employees who are implicated, especially if they are charged personally. It is the right thing to do, and it will be noticed by other managers.
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FIGURE 2–1 Different types of environmental risk.
Types of Environmental Risks Environmental risks can originate from within the company or from outside; these are internal and external risks. There are three temporal categories of environmental risks: “present,” “legacy,” and “latent.” (See Figure 2–1.) Internal risks emerge from operations within the company’s production facility fence line or at its other nonproduction activities. The effects of internal risks can be on the next street, fifteen miles downstream in another country, or thousands of miles away, in the case of large point-source air emissions, such as acidic emissions that cause acid precipitation. Internal risks can be classified by time frame as present, legacy, and latent. Present risks are risks that stem from today’s operations and can be subdivided into continuous and accidental risks. Continuous risks result from continuous activities such as discharging liquid effluents and air emissions as a result of routine production processes. Accidental risks occur suddenly, such as a tailings dam failure, pipeline rupture, and rail or road tanker accidents. Legacy risks are those that exist today due to the practices of the past. These can include the leaks from an old underground storage tank or ecological damage to land or water resulting from historic emissions or discharges. Both present and legacy risks can be known or unknown, depending upon the degree of oversight and management applied. Legacy risks take a while to understand and develop plans to deal with. Latent risks result from the practices of today but will not be evident until they are unearthed or realized at some future time. Today’s leaking underground fuel tank is tomorrow’s domestic contaminated well when the fuel migrates. Latent risk refers to situations that are developing now that will not be discovered, understood, or dealt with until sometime in the future. Historically such situations have resulted from practices that have left contamination in the soil and groundwater or that have resulted in contamination of sediments in receiving waters where effluents were discharged. Air, water, or soil contamination that becomes unacceptable after being discovered may have come from historic practices once considered acceptable.6 Of course it is not possible to predict changes in societal tolerance for industrial activities and their effects or what will be acceptable in the future. But such situations usually take a few
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years to develop, allowing risks to be identified, evaluated, and assessed, with treatments formulated in a timely manner—if one is watching. When such a situation is emerging, it may be important to modify production practices to accommodate the coming change. Nonyl phenol ethoxylates, or NPEs, are endocrine-disrupting chemicals found in soaps and detergents and once used in the pulp and paper industry. They were entirely legal and acceptable at the time, but we became concerned about them and their potential to become an issue by watching the press and monitoring the activities of environmental groups. After investigating, it became clear that our suppliers had effective alternatives to these chemicals. We went forward with a program for all mills to eliminate their purchase, even though the science was somewhat equivocal on the strength of the effects. We took some corporate risk in asking the suppliers of important process control chemicals for new formulations of their products. Our assessment was that although the science was controversial, the reputational risk was significant, the cost was manageable, the effect on our production process was negligible, and it could prevent a protracted regulatory response in the future. Two or three years later, an environmental regulator called to inform me that there was now a regulation limiting the use of NPEs. It was a pleasure to tell him that we had already eliminated them. Companies should regularly scan both internally and externally for emerging issues that can identify latent environmental risks to their operations. Matters that are identified as potential risks should be assessed to determine whether action is called for. Before acting, consider the potential effect on operations, the effort and cost required to “head things off” by changing current practice, the social risks, and the risk of diverging from industry practice, if applicable. “External risks” come from outside the fence inward, sometimes even from other countries. In the 1990s, the Canadian government enacted regulations limiting dioxin emissions in pulp and paper mill effluent.7 Though the toxicity of the dioxin and furan group of substances (here termed, collectively, dioxin) had been known for some decades, their occurrence in the pulp and paper industry was not observed until the 1980s in Sweden and the United States.8,9 In relatively short order, an alarm was raised, and the research and regularity community identified dangers and acceptable limits. The regulations resulted in substantial spending by the industry to change pulp bleaching systems and reduce dioxin in effluent to meet the regulatory levels—no detectable dioxin in pulp mill effluents. (It is worth noting that the detection limits were in the part per quadrillion range, or 1 picogram per liter of water.) At the time, the rapidity with which the issue developed and resulted in regulation and process changes necessitated very quick, and expensive, responses from the industry. External environmental risks might force changes to customers’ requirements that do not relate specifically to the way they use the product. Many big-box building supply stores are under customer pressure to sell lumber that has been certified as coming from sustainably managed forests and that is labeled as such—the Forest Stewardship Council is an example of such a standard. These risks can also come in the form of new regulations, such as the dioxin regulations cited above. Companies, especially smaller ones, can rarely control the emergence or progression of external risks. Companies can only control how they respond to external risks, not control the risks themselves. To identify external risks requires taking a sweeping view of social, scientific, and regulatory trends around the world. A good way to do this is
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through industry associations that can pool resources to track issues that might affect its members. Members of the board of directors typically have a wide view of the world and can be a valuable source of ideas and insights on trends. A board member, having read that NPEs might become an issue, asked one of the authors what was known about them. And it was that question that initiated our proactive response to the issue, already described.
Identifying Environmental Risks Suppose you were appointed as a new manager of some company or operation having a suite of environmental risks for which you are now responsible. How should you proceed? The first priority is to understand the processes of the company that are related to environmental risk at the appropriate level of detail for your new position. The precise position description for the new job will dictate whether the process understanding is at the production management level or the corporate strategic level. In either case, it is important to start by looking to the present risks, the legacy risks, and the latent risks, in that order. A good first step is to perform a review of operations. The review should have the following elements: Document review Site review ● Formal risk assessments ● ●
Document Review During the document review, you should review documentation describing present operations and the present risks that these operations entail, such as effluent exceedances or truck haulage accidents. Typical documents that offer a quick overview of the business are the permits and licenses under which it operates, design documents, and technical assessments of the operations, as well as environmental audits and regulatory reports. Legacy risks can be assessed by reviewing past practices and by accessing the corporate memory of these practices and the anecdotal evidence they generate. The corporate memory is the recollection and knowledge of operators and managers who are present or past employees of the operations. For latent risks, it is important to consider the known activities of the business in the context of emerging concerns in the press and among leading environmental groups. Most production facilities require a variety of environmental permits. These cover limits placed on effluents to water, emissions to air, solid, and hazardous wastes disposed of on site or off site. It is critical to make sure all the necessary permits are in place, up to date, and complied with. Permit requirements often include more than simple limits on emissions quality or quantity. Permits often require detailed and frequent reporting of everything from emissions data to reports on management of wastes—and sometimes even products stored within a facility. The administrative compliance aspect of permits is often the source of minor violations when the inspector comes calling.
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Site Review Familiarity with the site is critical. Fortunately, a site review need not be overly formal. One of the authors, when a new environmental officer at Noranda, was sent to a paper mill for the first time. The first order of business was a brief meeting with the mill manager and the local environmental manager. Mill management described the operations and risks at the site, indicating that compliance with effluent discharge regulations was considerably less than 100 percent and that there was a hazardous waste storage facility on site. In less than an hour, without a formal risk assessment, a good view of the site’s present environmental risks was gained. The types of risks one should look for in this initial review are related to permits effluent or emission compliance ● solid and hazardous waste management ● specific materials or operations that carry or increase risk ● ●
After the introductory meeting, we went on a site tour to look at the production operations and the various potential environmental risk locations. Such tours should follow the flow of the production process so that the origin of wastes and discharges is understood in the context of production. Eventually we visited the effluent treatment system and discharge point to get an understanding of the circumstances of effluent exceedance risks. Later we saw that the hazardous waste storage facility was unlocked and untidy, and located in an aging, repurposed building. The hazardous waste permit required that it be locked with access limited to designated personnel and that the contents be neatly stored and accessible. Clearly we were noncompliant on at least two counts and bore the risk of a charge and a fine, not to mention tampering by trespassers. By the end of the meeting and site tour, we had thus quickly established the main present environmental risks to the operation: There was a need to manage hazardous waste properly, either by using a better storage facility or by removing the waste from the site, and a mechanism was needed to curtail the frequency of untreated effluent overflows and improve the mill’s compliance with effluent limits. After the main present risks are understood and being acted upon, the new manager must take stock of legacy risks. A good approach is to ask whether there are any cleanup programs currently under way, planned, or known to be required. If there are, they should be well characterized, be reported to the applicable government agencies, have strategic long term objectives for cleanup or containment designed by consulting experts in these fields, and be able to be executed with a minimum of disruption. At one of Noranda’s plants, copper metal was bent, welded, and worked into specialized heat exchange tubing. In the process, the metal was degreased using a solvent, trichlorethylene, so that it could be properly worked. The solvent is a handy degreaser that is nonflammable, reusable, and economical. It is also cancer-causing and denser than water, so when it gets into the environment it is very difficult to recover. The facility had been closed and put up for sale, but the buyer insisted on an environmental study of the site, including drilling holes to
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see whether there was contamination on the property. After years of managing the solvent in accordance with old practices, the site had nevertheless been contaminated and groundwater affected. The contamination was discovered, the sale fell through, and Noranda was stuck with this legacy. The result was an expensive assessment and cleanup program and a seriously degraded asset value. Evidence of these risks can often be found during corporate due diligence in advance of transactions. When this occurs, it is typical for the owner to implement and pay for a cleanup, reduce the price, or offer indemnity for the purchaser. Commonly, banks or other lenders are involved in business transactions, and they typically have high standards for reviewing site contamination risks. The metalworks plant just described was a relatively small contamination event, but legacy risks can blossom into very large issues requiring multiyear and multi-million-dollar programs to mitigate. A good example is the Love Canal in Niagara Falls, New York, one of the earliest large historic contamination situations. In 1894, William T. Love started building a canal to connect the Niagara River with Lake Ontario for electric power production. The venture failed, but the excavation remained. Between 1942 and 1952, the Hooker Chemical Company used the old canal to dispose of wastes from their nearby manufacturing plant. When Hooker was finished, the waste was covered and the property was sold to the board of education of Niagara Falls, New York.10,11 Subsequently, the area became the site of a new neighborhood, complete with schools. In the late 1970s, leaks from the site resulted in health effects and, eventually, the closure and remediation of the entire neighborhood. The events kicked off a level of concern for chemical wastes and disposal practices that eventually changed how the industry handled hazardous waste disposal.
Formal Environmental Risk Assessments in Operations Most operations have present risks that are unknown or that are known by someone in the operation but without the knowledge being institutional—and thus the risks are not managed. Formal risk assessments are a useful way to identify these risks and develop plans for treating them. At Noranda Forest, we encouraged operations managers to conduct formal risk assessments in their operations. These assessments followed the general outline described in Chapter 1. In each major operating area—for example, the paper machine, the wood room, the receiving area, or the waste water treatment plant—we established a risk assessment team. The teams always had one or two operators, preferably one of whom was an “old-timer” who had seen upset conditions over the years. They also had a process engineer, someone from maintenance—frequently an instrumentation technician—and the supervisor. A risk consultant was often engaged to facilitate the teams through the risk assessment process. The criteria used to evaluate consequences were derived from the corporate environmental policy. This provided some standardization in how the risk assessment teams evaluated risks. Mostly these teams identified mundane but still important risks, such as lubricating or hydraulic oil leaks or spills that could get into the effluent. Occasionally they identified serious risks such as leaks of toxic gases that could have had very serious consequences in the mills and in surrounding communities. In all cases, the teams prioritized the risks and made
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recommendations for preventing, detecting, and reacting to them. Management reviewed and occasionally reprioritized the risks and included them in maintenance, capital, and training budgets. We followed up the implementation of treatments in our audit program. (See Section 5.)
Environmental Risk Management: The Noranda Model—and Beyond Noranda, Inc., parent company of Noranda Forest, was a major Canadian natural resources company that owned assets in mining, forest products, energy, and manufacturing businesses, primarily in the Americas and Europe. The company understood the inherent intrusiveness of resource developments and installed an environmental management system in the 1980s. In the mid- to late 1980s, Noranda managed environmental risk using two basic tools—oversight and audits. Both were driven by a corporate environmental policy that was to be implemented in each operation. The corporation had installed a corporate environmental department charged to ensure that environmental risks were being identified and managed. As the system evolved, more familiar risk management steps of identification, assessment, analysis, prioritization, and treatment were employed. The corporate environmental staff were assigned to groups of similar operations and liaised closely with facility management to review present and legacy risks. The results of this oversight system were reported quarterly to the board of directors through the environmental committee of the board by the senior vice president of environment.12 Demonstrating effective policy implementation at each production facility is an exercise in long-term assessment of results. In the Noranda model, environmental staff members reported on the efforts and results of their assigned operations. This ensured day-to-day improvements and focus on improving operations and reducing risks within those operations. But with the financial, reputational, and personal risks involved in environmental matters, senior management and the board required greater assurance, so the company implemented an environmental auditing system both as an early risk identification tool and, ultimately, as a long-term continual improvement system. Environmental auditing had emerged as a corporate risk management approach in the early 1980s to fill this need. Noranda’s corporate environmental audits started with emergency preparedness auditing and came to encompass industrial hygiene and occupational health. They grew from the aftermath of the tragic Bhopal incident in India, as a result of which several thousand people died from accidental emissions on the part of a chemical facility. Audit teams were composed of trained staff members from different production facilities, often from different industrial groups within the company. The corporate audit manager assembled the teams under an experienced auditor and sent them to the subject site. Each audit typically took three to five days. Site operations and records were reviewed for compliance with regulations, adherence to corporate policy, and conformance to best practices. The
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final report of the audit presented a list of findings to the plant manager and their immediate superior. Action plans to resolve the findings (treat the risks) were developed by the facility based on the risk analysis and prioritization of each particular risk. These were vetted by corporate staff and the site implemented the actions on a schedule. The board of directors received quarterly reports on the performance of the audit program. Quarterly reports included the number of audits completed, the number of findings found, the action plans developed, and the rate of completion of the findings. This cycle of audit findings established a de facto environmental management system (EMS) even before the named concept had become a widely understood system within corporate management. Noranda’s system was adopted by its mining and forest product subsidiaries and was at the root of Noranda’s improving environmental performance. The oversight provided by corporate environmental staff helped operations correct the findings and also identify new areas of focus. The combination of oversight and auditing does not ensure that legal risks from past noncompliances will not result in charges to the company, as discussed earlier, but it does reduce exposure by identifying and treating risks as well as offering a due diligence defense in cases in which “strict” legal liability permits it. In the 1990s, the increased awareness of corporate environmental risks prompted the International Organization for Standardization (ISO) to establish a standard environmental management system template based on its successful quality management standard (ISO 9000). This system has widely acknowledged for including steps that identify, assess, analyze, and prioritize risks in a cyclical process designed to foster continual improvement. Accordingly, ISO 14000 has emerged as a useful overall framework for managing environmental risks. Companies using the ISO 14000 system have the opportunity to be registered by a third party as being ISO 14000 compliant and can then use this designation in their branding. Subsequent the legal case related to above, Noranda Forest decided to ensure that a management system approach was in place at each operation but noted that the ISO approach had the potential to be overly bureaucratic and time-consuming in some implementations. Furthermore, the benefits of registration were not universally accepted as useful owing to the time consumed and the expense. In the end, the choice of management system (homegrown or ISO) and registration (if ISO) was left to the operations themselves. Corporate policy dictated that “systematic environmental management” be implemented. Operations could choose ISO or modifications thereof or their own systems. Operations were monitored in their implementation of systematic management using a measurement tool specifically designed by the environment department for the purpose and reported quarterly to the board of directors. After management systems had been implemented, the company environmental audit system monitored their operation on a two- to three-year cycle and also reported it to the environmental committee of the board. Interestingly, most sites decided to use a modified ISO 14000 template, and few decided to be certified. At one of the sites that chose ISO 14000 registration, the manager, a man having a long and successful career in leadership, felt that certification was a useful discipline for the operation in the long term. He once commented, “I am more worried about losing a public certification than having the corporate office mad at me.”
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It is our experience that systematic environmental management systems are best put in place by line managers, meaning the people who manage the production facilities that carry the risks. They are best placed to understand the site’s environmental risks and to be able to establish the best solutions for their reduction. Whether it be a homegrown system such as Noranda’s oversight and audit system or an ISO template, so long as it is championed by senior corporate leadership and implemented by line and production managers, risk reductions should be achieved.
Approvals for Large Industrial Projects: The Environmental Risks Chapter 4 of this book describes the management of project risks, beginning after a project has been given permission to proceed. Obtaining environmental permits for large industrial projects to proceed, however, cannot be taken for granted as a perfunctory process leading to assured approval. There is often substantial risk that permits will be denied. It is usual for major permits for a large project, or even a relatively small project, to be finally adjudicated in the political realm, further increasing risk. Clear assessments of environmental and social risk for projects in the permitting phase are required to reduce these risks and to successfully acquire the permits necessary to operate. Minerals development projects are a case in point, for they follow a multistage path, including prospecting, exploration, and deposit delineation in the field. At that point, if there is the likelihood of a successful mine, the project moves toward environmental baseline studies, system design, permitting, construction, operation, and ultimately, closure and abandonment. At each stage financial resources must be acquired from investors or debt to advance the development of the project. Because of the high-risk nature of minerals projects, the industry has developed very detailed and sophisticated methods to evaluate, design, and assess projects so as to reduce risk to investors. A tremendous amount of effort is appropriately expended in delineating the area of the ore body during the exploration stage. This, along with very detailed engineering planning and design, is prepared so that financing can be acquired from investors or lenders who are comfortable with the geological, technical and financial risks of the project. Historically there has not been the same attention focused on the regulatory and social aspects of the project, and this has led to some significant difficulties. Acquiring the permissions to develop a project is an expensive and time-consuming activity that must be considered in the overall schedule, capital requirements, and design of a project. Typically in developed countries there exist regulations that require environmental assessments; licenses for exploration, production, and abandonment; and licensing to cover the uses of water for processing or waste discharge. In most countries these are subject to detailed evaluation, often in public fora, as well as to public input. These public processes afford a convenient avenue for public interest groups to provide input or opposition to a project. The level of public scrutiny on natural resource projects has grown in the face of large projects in remote areas and occasional spectacular failures, such as a major tailings dam failure at the Mount Polly mine in British Columbia on August 4, 2014.13,14
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Who Does What? Establishing an organizational structure that facilitates identification and mitigation of environmental risks necessitates attention at all levels of the company. Though it may not be absolutely necessary in smaller entities to have a dedicated department for the purpose, the responsibilities and actions need to be identified and delegated. In cases in which a corporate structure exists for several business units, leaders can consider implementing a corporate environmental management group. In any structured management system, it must be decided who does what. A guiding principle for developing this system is to have the decision making authority at the correct level of the organization for effective and efficient action.
Line versus Staff Roles Although the environmental role must be carried out by someone in the organization, the scale of the entity makes a difference in how this function might be organized. In small organizations with minimal environmental risk, line operating personnel can complete these tasks as a part of their regular job description. This could apply for example to a small manufacturer that generates a small amount of hazardous waste—for example, paint booth waste. Because there is typically a highly regulated process for handling, shipping, and disposing of this material, a production manager could carry out the function. In a large single manufacturing site or a medium-sized corporation having multiple sites, a dedicated environmental position is often preferable. In a single manufacturing facility, the role would be to carry out some of the functions but also serve as a source of new information on environmental risk from outside the company. The environmental position could be responsible for identifying risks and evaluating treatments to reduce them as well as having an operational role in managing a site waste management facility. In large organizations, or even small or medium-sized companies in some high-risk industries, a dedicated environmental staff operating at a corporate level will serve to assess the risks of the operations and the industry as a whole and bring these to the operation side of the business for consideration. A healthy dialogue between the staff and line personnel will ensure that operational personnel can bring issues forward while being open to those brought by the environmental staff. The operational personnel should take the lead in implementing the necessary changes in operations to address the identified risks, because they know their facilities and processes better than anyone else. It is appropriate for environmental personnel to bring possible solutions for consideration and to coach, and occasionally even cajole, operators over the magnitude of the risk and the need to find solutions. If an impasse is reached, then the matter should be moved to the next corporate level for consideration and resolution. It is important to see this as a normal course of events and not a negative reflection on either party. A systemized environmental management approach, such as ISO, can foster good relations in these situations. It is important that the environment department not be seen as a policing entity. Cooperation and joint objectives with operations are critical to the effective reduction of environmental risk. A policing demeanor on the part of environmental staff can lead to concealing important issues,
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which increases risk, confrontation, and in the event of an environmental failure, much acrimony and finger-pointing. This cooperative stance must be especially present in the environmental audit. Audits are an important aspect of providing assurance that management systems are functioning, but they should not be about catching someone out or inflicting maximum scrutiny on operations. The audit should be positioned and supported as a help to the site managers to continually improve their performance in measured and meaningful steps. Most audits generate a list of findings that need to be addressed. Our experience is that site managers are interested in improving their operations and find lists of things to do a helpful way to focus and delegate execution. This is especially true when they have the opportunity to schedule actions to meet their needs and even to contest findings with which they do not agree.
The Role of the Board of Directors and Senior Managers—Governance The direction from senior management and the board of directors is critical to successful environmental risk management. For the board, the governance role should be to ensure that there is a corporate policy on environmental matters that improves environmental performance and reduces the risk to the corporation and to the interests of the shareholders. With the guidance of senior environmental staff and possibly eternal experts, and with an understanding of the company’s environmental risks, the board can formulate a clear and concise policy. After this is done, the role should transition to monitoring the implementation of the policy and the quality of its operational results. Regular reports from management should demonstrate performance against achievement of the key environmental indicators and the objectives of the company. Indicators can be compliance measures, waste or emissions reduction objectives, or product initiatives. In some cases, the board may wish to install an environmental committee to more closely track some of the more technical or complex discussions necessary to set policy and evaluate progress. The role of the environment committee is not only risk reduction, but also to serve as a support to the executive team in culture building and policy setting. In other words, they aid in “directing” the company, not only protecting it from risks. Chapter 14 of this book discusses the role of the board of directors in risk management more generally.
Management Incentives It is important to make clear to management through their remuneration that environmental performance and risk management are important. Frequently there are discussions about whether variable compensation (in the form of a bonus) should be linked positively or negatively to compliance with environmental regulatory standards. (Chapter 13 of this book discusses in more depth risk culture and the role of incentive plans on shaping it.) Should a manager receive a bonus for improving the compliance frequency of facility air emissions—or is meeting this standard part of the job and therefore reimbursed within the bounds of salary compensation? Similarly, consider whether bonuses are provided to financial staff for not filing illegal or erroneous tax submissions to the government. It may be that the “improvement” of a poor situation is a bonus-worthy objective in a particular context and incentive framework—or it may not be. It all depends on the structure and philosophy of the compensation program.
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What is critically important is ensuring that achievement of environmental objectives is included in the variable compensation opportunities of relevant management (and other) personnel. Whether the KPIs in question are related to the reduction of risk or the improvement of environmental circumstances for the business, the increased acceptance of a company by stakeholders, supply chain management to reduce environmental footprint, or simply compliance with regulatory obligations, communicating their importance within the remuneration structure is good management.
The Importance of Corporate Culture—from the Board Room to the Shop Floor Much has been said and written about corporate culture and its importance in achieving results. Indeed, Chapter 13 of this book covers the topic. Once again, leadership is important to environmental culture. If leadership does not ask environmental performance questions of operations, then little emphasis will be perceived. Leaders must send messages to the employees that demonstrate their own commitment to good performance and their willingness to commit the company as well. Early in Noranda’s environmental management evolution, it was faced with a serious risk based on its contribution to acid rain degeneration of lakes and forests in the Canadian Shield. A senior leader of the company, after hearing the details of this risk, reportedly remarked, “We must not ruin the environment with acid rain.” That was a number of years ago and today a culture of environmental leadership is even more firmly installed in the new generation of corporate leaders. A generation of environmental regulation, media focus, societal reforms, and educational initiatives has raised the base knowledge and impetus for protecting and managing the environment. Thus many corporate environmental programs find fertile ground for implementation among the employees and leaders of today. However, companies are creations of humans, so continual vigilance is necessary to ensure that backsliding does not occur and that the great challenges of the present and future, such as climate change, resource depletion, and water quality are met by the creativity and focus that can be brought by corporations.
Notes 1. Polychlorinated biphenyls. 2. U.S. Environmental Protection Agency. Polychlorinated Biphenyls (PCBs): Health Effects of PCBs, www.epa.gov/ osw/hazard/tsd/pcbs/pubs/effects.htm. 3. Chlorofluorocarbons. 4. Claudia Cattaneo, “TransCanada in Eye of the Storm,” Financial Post (Toronto), September 8, 2011. 5. Peter Sandman, Responding to Community Outrage: Strategies for Effective Risk Communication. (Fairfax, VA: American Industrial Hygiene Association, 1996). 6. Editor’s note: This is an example of acceptable residual risks’ becoming new unacceptable risks, described in Chapter 1. 7. Pulp and Paper Mill Effluent Chlorinated Dioxins and Furans Regulations (SOR/92-267), Canadian Environmental Protection Act, 1999. 8. Ray C. Whittemore, LaFleur, L. E., Gillespie, W. J., Amendola, G. A., Helms, J., “USEPA/Paper Industry Cooperative Dioxin Study: The 104 Mill Study, Chemosphere, Vol. 20, Nos. 10–12 (1990): 1625–1632.
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9. U.S. EPA/Paper Industry Cooperative Dioxin Screening Study, Office of Water, Office of Water Regulations and Standards, Washington, DC, EPA-440/I-88-025. 10. New York State Department of Health, “Love Canal: A Special Report to the Governor and Legislature: April 1981” (2005), http://www.health.ny.gov/environmental/investigations/love_canal/lcreport.htm#history. 11. The Niagara Gazette, “Love Canal Chronology, 1984–1980.” http://library.buffalo.edu/libraries/specialcollections/ lovecanal/about/chronology.php. 12. Both authors of this chapter worked at the Noranda Group of Companies. 13. Imperial Metals, Inc., “Tailings Breach Information.” www.imperialmetals.com/s/Mt_Polley_Update. asp?ReportID=671041. 14. The Globe and Mail, “Waste Water from Central B.C. Mine Spills into Waterways, Prompting Water-Use Ban.” August 5, 2014, www.theglobeandmail.com/news/british-columbia/ water-use-ban-imposed-after-tailings-pond-breached-near-fraser-river/article19911069/.
Environmental risks arise from the relationships of corporations with the natural environment and with the entities that regulate, protect, and manage the environment. Sources of environmental risk include energy use and its effects, greenhouse gas emissions, water use and discharges, waste disposal, site contamination, and effects on biodiversity. Many corporate activities, such as manufacturing, mining, importing new materials, and selling automobiles, are the subject of environmental regulations developed to protect the environment. There is considerable risk in not achieving compliance with their requirements. Environmental risks can be viewed through a social risk lens, and vice versa. Social risks arise when people react to corporate effects, whether actual or perceived, on the environment. The usual public reaction to industrial effects on the environment is ambivalence. But some effects, actual, proposed or perceived, can incite people to outrage, demonstrations, letters to the editor, boycotts, media campaigns, complaints to government officials, and lawsuits. Many such complaints will lead to investigations and even charges. There is political risk (see Chapter 15 on Political Risk), for companies can lose the support of political friends and elected officials such as a mayor or governor and even lose the support of industry groups. A company could wind up with disgruntled employees or have difficulty attracting employees because of its poor environmental reputation. This general sullying of personal and corporate reputations can affect a company’s brand (see Chapter 8 on Brand Risk) and can have serious personal effects on managers who might be implicated.
Environmental Risks—the Social Dimension Why do some members of the public get upset about environmental risks that experts are not concerned about? People often distrust experts, especially when they disagree with one another, and with good reason: In many high-profile cases, the experts have been wrong. Experts claimed PCBs1 were inert and stable and thus ideal for use in electrical equipment. Years later, it was found they accumulate up the food chain and are persistent in nature. The U.S. Environmental Protection Agency describes their many toxic effects on humans and animals.2 CFCs3 were introduced because of their firefighting properties and because experts said that they were less dangerous than ammonia for refrigeration and air conditioning. After many years of use, it was discovered that they were burning a hole in the ozone layer of the atmosphere over Antarctica. Governments around the world have banned both chemicals. 17
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People’s reaction to environmental risk is strongly driven by the control (or lack thereof ) that they can exert over the source of risk. People are more likely to get outraged if they feel that the company gets all the profits from taking a risk and the people get all the consequences—with little or no say in how the risk will be managed. And not only exotic chemicals provoke this reaction: There were, and still are, major campaigns lead by public interest groups against forestry, energy, and mining operations. Some “outraged” people live near these operations, but many more are not directly affected. Their outrage is often driven by broader concerns about the environment. In 2005, TransCanada Corporation proposed the Keystone XL pipeline expansion, a 327-mile shortcut between existing pipelines that would shorten the distance between Canada’s oil sands and the U.S. Gulf Coast refineries. Well-known climate scientists, environmental groups, newspapers, and celebrities opposed the project on environmental and climate grounds. Protests drew tens of thousands of people. The CEO of TransCanada called the pipeline “routine,” saying that the company had been building pipelines for more than half a century and that 200,000 miles of similar pipeline already existed in the United States.4 Yet at the time of writing, the project was still in limbo, with President Obama deferring a decision indefinitely. When determining the consequences of environmental risks, you should determine the potential for community “outrage,”5 because it is capable of halting a project or exaggerating a technically minor incident or project proposal. People often find many environmental effects outrageous even when technically informed people—experts—performing risk assessments judge the mechanical, physical or chemical or biological risks to be minimal. Thus environmental risks and social reaction to them must be considered together. Consider the following example. Some of the world’s best wood fiber for papermaking is made by a chemical process called the Kraft process. The Kraft pulp process emits a strong, pungent odor similar to that of rotten eggs. Though the smell is unpleasant, there are no known health effects at the usual concentrations. At a Kraft pulp mill in Thurso, Quebec, the odor had been prevalent for many years. The mill had been in the town for several decades, and many employees were residents of the town. Because of this, and perhaps because the nose becomes somewhat accustomed to the odor, this situation had been more or less tolerated over the years. In the late 1980s and 1990s, the number of odor complaints increased. In addition, when there was an easterly wind, the odor would waft into downtown Ottawa, about 30 kilometers away, increasing the complaint halo. The managers of the mill did nothing for a while, as was often the case at that time. They believed the mill to be an important economic contributor to the community—and, in any case, it was not affecting public health. But complaints became increasingly frequent and vociferous. National political leaders in Ottawa joined in the fray. Eventually, to keep the peace, the company was obliged to implement a project in excess of $20 million to remove 90 percent of the odor. The complaints went away. To preserve the company’s reputation, the company’s board of directors had approved a zero-financial return project at a time when the pulp industry, and that mill, were not doing well.
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Environmental Risk—the Legal Dimension To ensure adherence to protection measures demanded by society, and to ensure that all actors are guided by the same standard, governments establish laws and regulations carrying financial sanctions for companies and personal sanctions for managers. Though fines and financial measures are criticized by some because they can be seen as a cost of doing business, personal charges against managers and directors are a different matter and necessitate clear actions by the directing minds of corporations. To protect their companies and themselves from prosecution directors and managers must install meaningful environmental policies that are implemented through an environmental management system. Then they must regularly follow up to ensure, through oversight visits and formal audits, that the system is working. In this manner, they will be preventing mishaps and will have a defense of due diligence in the event of mishap. In the authors’ experience, environmental charges laid against companies can have significant financial and legal implications. In the 1990s, a paper mill (we’ll call it Mill 1) was charged with multiple contraventions of the effluent discharge regulations, and the mill manager was personally charged with many counts related to the same discharge contraventions. Potential fines for the charges amounted to $160 million, though legal precedent indicated clearly that fines were likely to be no more than $5 million—still a notable sum. The mill had had a history of overflows of untreated effluent from the mill sewer system during the previous several years. This had attracted the attention of the corporate environment department, which had been monitoring the mill’s environmental compliance data every month and the mill had been through the regular corporate environmental audit program. The factors causing the overflows had been identified as risks of these processes. Risk management and reduction programs and projects were implemented, in response to the audit, to deal with the overflow situation. Overflow frequency had been greatly reduced over the prior two or three years and were rare at the time when the charges were laid. Nevertheless, the regulators laid charges for violations in previous years. In the words of one senior manager, “with that many charges, chances are we are guilty of something.” Hence, the legal strategy was to have the charges against the mill manager dropped, and reduce the penalties to the corporation, by pleading guilty to a reduced number of infractions. Ultimately both of these objectives were achieved, and a modest fine was paid. The lesson is that even though the risk of environmental harm can be identified and effectively reduced by risk assessment, oversight, auditing, and follow-up, past regulatory violations may be on the record, creating enhanced legal risk until the statute of limitations has run. There is a personal side to this, too, for despite the best intentions of the company, the episode took a considerable personal toll on the mill manager and his family. Companies need, first and foremost, to ensure that they are in compliance with the rules and avoid charges. But in the case of charges, it is critical to consider very carefully how best to support and assist employees who are implicated, especially if they are charged personally. It is the right thing to do, and it will be noticed by other managers.
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FIGURE 2–1 Different types of environmental risk.
Types of Environmental Risks Environmental risks can originate from within the company or from outside; these are internal and external risks. There are three temporal categories of environmental risks: “present,” “legacy,” and “latent.” (See Figure 2–1.) Internal risks emerge from operations within the company’s production facility fence line or at its other nonproduction activities. The effects of internal risks can be on the next street, fifteen miles downstream in another country, or thousands of miles away, in the case of large point-source air emissions, such as acidic emissions that cause acid precipitation. Internal risks can be classified by time frame as present, legacy, and latent. Present risks are risks that stem from today’s operations and can be subdivided into continuous and accidental risks. Continuous risks result from continuous activities such as discharging liquid effluents and air emissions as a result of routine production processes. Accidental risks occur suddenly, such as a tailings dam failure, pipeline rupture, and rail or road tanker accidents. Legacy risks are those that exist today due to the practices of the past. These can include the leaks from an old underground storage tank or ecological damage to land or water resulting from historic emissions or discharges. Both present and legacy risks can be known or unknown, depending upon the degree of oversight and management applied. Legacy risks take a while to understand and develop plans to deal with. Latent risks result from the practices of today but will not be evident until they are unearthed or realized at some future time. Today’s leaking underground fuel tank is tomorrow’s domestic contaminated well when the fuel migrates. Latent risk refers to situations that are developing now that will not be discovered, understood, or dealt with until sometime in the future. Historically such situations have resulted from practices that have left contamination in the soil and groundwater or that have resulted in contamination of sediments in receiving waters where effluents were discharged. Air, water, or soil contamination that becomes unacceptable after being discovered may have come from historic practices once considered acceptable.6 Of course it is not possible to predict changes in societal tolerance for industrial activities and their effects or what will be acceptable in the future. But such situations usually take a few
Chapter 2 l Environmental Risk 21
years to develop, allowing risks to be identified, evaluated, and assessed, with treatments formulated in a timely manner—if one is watching. When such a situation is emerging, it may be important to modify production practices to accommodate the coming change. Nonyl phenol ethoxylates, or NPEs, are endocrine-disrupting chemicals found in soaps and detergents and once used in the pulp and paper industry. They were entirely legal and acceptable at the time, but we became concerned about them and their potential to become an issue by watching the press and monitoring the activities of environmental groups. After investigating, it became clear that our suppliers had effective alternatives to these chemicals. We went forward with a program for all mills to eliminate their purchase, even though the science was somewhat equivocal on the strength of the effects. We took some corporate risk in asking the suppliers of important process control chemicals for new formulations of their products. Our assessment was that although the science was controversial, the reputational risk was significant, the cost was manageable, the effect on our production process was negligible, and it could prevent a protracted regulatory response in the future. Two or three years later, an environmental regulator called to inform me that there was now a regulation limiting the use of NPEs. It was a pleasure to tell him that we had already eliminated them. Companies should regularly scan both internally and externally for emerging issues that can identify latent environmental risks to their operations. Matters that are identified as potential risks should be assessed to determine whether action is called for. Before acting, consider the potential effect on operations, the effort and cost required to “head things off” by changing current practice, the social risks, and the risk of diverging from industry practice, if applicable. “External risks” come from outside the fence inward, sometimes even from other countries. In the 1990s, the Canadian government enacted regulations limiting dioxin emissions in pulp and paper mill effluent.7 Though the toxicity of the dioxin and furan group of substances (here termed, collectively, dioxin) had been known for some decades, their occurrence in the pulp and paper industry was not observed until the 1980s in Sweden and the United States.8,9 In relatively short order, an alarm was raised, and the research and regularity community identified dangers and acceptable limits. The regulations resulted in substantial spending by the industry to change pulp bleaching systems and reduce dioxin in effluent to meet the regulatory levels—no detectable dioxin in pulp mill effluents. (It is worth noting that the detection limits were in the part per quadrillion range, or 1 picogram per liter of water.) At the time, the rapidity with which the issue developed and resulted in regulation and process changes necessitated very quick, and expensive, responses from the industry. External environmental risks might force changes to customers’ requirements that do not relate specifically to the way they use the product. Many big-box building supply stores are under customer pressure to sell lumber that has been certified as coming from sustainably managed forests and that is labeled as such—the Forest Stewardship Council is an example of such a standard. These risks can also come in the form of new regulations, such as the dioxin regulations cited above. Companies, especially smaller ones, can rarely control the emergence or progression of external risks. Companies can only control how they respond to external risks, not control the risks themselves. To identify external risks requires taking a sweeping view of social, scientific, and regulatory trends around the world. A good way to do this is
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through industry associations that can pool resources to track issues that might affect its members. Members of the board of directors typically have a wide view of the world and can be a valuable source of ideas and insights on trends. A board member, having read that NPEs might become an issue, asked one of the authors what was known about them. And it was that question that initiated our proactive response to the issue, already described.
Identifying Environmental Risks Suppose you were appointed as a new manager of some company or operation having a suite of environmental risks for which you are now responsible. How should you proceed? The first priority is to understand the processes of the company that are related to environmental risk at the appropriate level of detail for your new position. The precise position description for the new job will dictate whether the process understanding is at the production management level or the corporate strategic level. In either case, it is important to start by looking to the present risks, the legacy risks, and the latent risks, in that order. A good first step is to perform a review of operations. The review should have the following elements: Document review Site review ● Formal risk assessments ● ●
Document Review During the document review, you should review documentation describing present operations and the present risks that these operations entail, such as effluent exceedances or truck haulage accidents. Typical documents that offer a quick overview of the business are the permits and licenses under which it operates, design documents, and technical assessments of the operations, as well as environmental audits and regulatory reports. Legacy risks can be assessed by reviewing past practices and by accessing the corporate memory of these practices and the anecdotal evidence they generate. The corporate memory is the recollection and knowledge of operators and managers who are present or past employees of the operations. For latent risks, it is important to consider the known activities of the business in the context of emerging concerns in the press and among leading environmental groups. Most production facilities require a variety of environmental permits. These cover limits placed on effluents to water, emissions to air, solid, and hazardous wastes disposed of on site or off site. It is critical to make sure all the necessary permits are in place, up to date, and complied with. Permit requirements often include more than simple limits on emissions quality or quantity. Permits often require detailed and frequent reporting of everything from emissions data to reports on management of wastes—and sometimes even products stored within a facility. The administrative compliance aspect of permits is often the source of minor violations when the inspector comes calling.
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Site Review Familiarity with the site is critical. Fortunately, a site review need not be overly formal. One of the authors, when a new environmental officer at Noranda, was sent to a paper mill for the first time. The first order of business was a brief meeting with the mill manager and the local environmental manager. Mill management described the operations and risks at the site, indicating that compliance with effluent discharge regulations was considerably less than 100 percent and that there was a hazardous waste storage facility on site. In less than an hour, without a formal risk assessment, a good view of the site’s present environmental risks was gained. The types of risks one should look for in this initial review are related to permits effluent or emission compliance ● solid and hazardous waste management ● specific materials or operations that carry or increase risk ● ●
After the introductory meeting, we went on a site tour to look at the production operations and the various potential environmental risk locations. Such tours should follow the flow of the production process so that the origin of wastes and discharges is understood in the context of production. Eventually we visited the effluent treatment system and discharge point to get an understanding of the circumstances of effluent exceedance risks. Later we saw that the hazardous waste storage facility was unlocked and untidy, and located in an aging, repurposed building. The hazardous waste permit required that it be locked with access limited to designated personnel and that the contents be neatly stored and accessible. Clearly we were noncompliant on at least two counts and bore the risk of a charge and a fine, not to mention tampering by trespassers. By the end of the meeting and site tour, we had thus quickly established the main present environmental risks to the operation: There was a need to manage hazardous waste properly, either by using a better storage facility or by removing the waste from the site, and a mechanism was needed to curtail the frequency of untreated effluent overflows and improve the mill’s compliance with effluent limits. After the main present risks are understood and being acted upon, the new manager must take stock of legacy risks. A good approach is to ask whether there are any cleanup programs currently under way, planned, or known to be required. If there are, they should be well characterized, be reported to the applicable government agencies, have strategic long term objectives for cleanup or containment designed by consulting experts in these fields, and be able to be executed with a minimum of disruption. At one of Noranda’s plants, copper metal was bent, welded, and worked into specialized heat exchange tubing. In the process, the metal was degreased using a solvent, trichlorethylene, so that it could be properly worked. The solvent is a handy degreaser that is nonflammable, reusable, and economical. It is also cancer-causing and denser than water, so when it gets into the environment it is very difficult to recover. The facility had been closed and put up for sale, but the buyer insisted on an environmental study of the site, including drilling holes to
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see whether there was contamination on the property. After years of managing the solvent in accordance with old practices, the site had nevertheless been contaminated and groundwater affected. The contamination was discovered, the sale fell through, and Noranda was stuck with this legacy. The result was an expensive assessment and cleanup program and a seriously degraded asset value. Evidence of these risks can often be found during corporate due diligence in advance of transactions. When this occurs, it is typical for the owner to implement and pay for a cleanup, reduce the price, or offer indemnity for the purchaser. Commonly, banks or other lenders are involved in business transactions, and they typically have high standards for reviewing site contamination risks. The metalworks plant just described was a relatively small contamination event, but legacy risks can blossom into very large issues requiring multiyear and multi-million-dollar programs to mitigate. A good example is the Love Canal in Niagara Falls, New York, one of the earliest large historic contamination situations. In 1894, William T. Love started building a canal to connect the Niagara River with Lake Ontario for electric power production. The venture failed, but the excavation remained. Between 1942 and 1952, the Hooker Chemical Company used the old canal to dispose of wastes from their nearby manufacturing plant. When Hooker was finished, the waste was covered and the property was sold to the board of education of Niagara Falls, New York.10,11 Subsequently, the area became the site of a new neighborhood, complete with schools. In the late 1970s, leaks from the site resulted in health effects and, eventually, the closure and remediation of the entire neighborhood. The events kicked off a level of concern for chemical wastes and disposal practices that eventually changed how the industry handled hazardous waste disposal.
Formal Environmental Risk Assessments in Operations Most operations have present risks that are unknown or that are known by someone in the operation but without the knowledge being institutional—and thus the risks are not managed. Formal risk assessments are a useful way to identify these risks and develop plans for treating them. At Noranda Forest, we encouraged operations managers to conduct formal risk assessments in their operations. These assessments followed the general outline described in Chapter 1. In each major operating area—for example, the paper machine, the wood room, the receiving area, or the waste water treatment plant—we established a risk assessment team. The teams always had one or two operators, preferably one of whom was an “old-timer” who had seen upset conditions over the years. They also had a process engineer, someone from maintenance—frequently an instrumentation technician—and the supervisor. A risk consultant was often engaged to facilitate the teams through the risk assessment process. The criteria used to evaluate consequences were derived from the corporate environmental policy. This provided some standardization in how the risk assessment teams evaluated risks. Mostly these teams identified mundane but still important risks, such as lubricating or hydraulic oil leaks or spills that could get into the effluent. Occasionally they identified serious risks such as leaks of toxic gases that could have had very serious consequences in the mills and in surrounding communities. In all cases, the teams prioritized the risks and made
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recommendations for preventing, detecting, and reacting to them. Management reviewed and occasionally reprioritized the risks and included them in maintenance, capital, and training budgets. We followed up the implementation of treatments in our audit program. (See Section 5.)
Environmental Risk Management: The Noranda Model—and Beyond Noranda, Inc., parent company of Noranda Forest, was a major Canadian natural resources company that owned assets in mining, forest products, energy, and manufacturing businesses, primarily in the Americas and Europe. The company understood the inherent intrusiveness of resource developments and installed an environmental management system in the 1980s. In the mid- to late 1980s, Noranda managed environmental risk using two basic tools—oversight and audits. Both were driven by a corporate environmental policy that was to be implemented in each operation. The corporation had installed a corporate environmental department charged to ensure that environmental risks were being identified and managed. As the system evolved, more familiar risk management steps of identification, assessment, analysis, prioritization, and treatment were employed. The corporate environmental staff were assigned to groups of similar operations and liaised closely with facility management to review present and legacy risks. The results of this oversight system were reported quarterly to the board of directors through the environmental committee of the board by the senior vice president of environment.12 Demonstrating effective policy implementation at each production facility is an exercise in long-term assessment of results. In the Noranda model, environmental staff members reported on the efforts and results of their assigned operations. This ensured day-to-day improvements and focus on improving operations and reducing risks within those operations. But with the financial, reputational, and personal risks involved in environmental matters, senior management and the board required greater assurance, so the company implemented an environmental auditing system both as an early risk identification tool and, ultimately, as a long-term continual improvement system. Environmental auditing had emerged as a corporate risk management approach in the early 1980s to fill this need. Noranda’s corporate environmental audits started with emergency preparedness auditing and came to encompass industrial hygiene and occupational health. They grew from the aftermath of the tragic Bhopal incident in India, as a result of which several thousand people died from accidental emissions on the part of a chemical facility. Audit teams were composed of trained staff members from different production facilities, often from different industrial groups within the company. The corporate audit manager assembled the teams under an experienced auditor and sent them to the subject site. Each audit typically took three to five days. Site operations and records were reviewed for compliance with regulations, adherence to corporate policy, and conformance to best practices. The
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final report of the audit presented a list of findings to the plant manager and their immediate superior. Action plans to resolve the findings (treat the risks) were developed by the facility based on the risk analysis and prioritization of each particular risk. These were vetted by corporate staff and the site implemented the actions on a schedule. The board of directors received quarterly reports on the performance of the audit program. Quarterly reports included the number of audits completed, the number of findings found, the action plans developed, and the rate of completion of the findings. This cycle of audit findings established a de facto environmental management system (EMS) even before the named concept had become a widely understood system within corporate management. Noranda’s system was adopted by its mining and forest product subsidiaries and was at the root of Noranda’s improving environmental performance. The oversight provided by corporate environmental staff helped operations correct the findings and also identify new areas of focus. The combination of oversight and auditing does not ensure that legal risks from past noncompliances will not result in charges to the company, as discussed earlier, but it does reduce exposure by identifying and treating risks as well as offering a due diligence defense in cases in which “strict” legal liability permits it. In the 1990s, the increased awareness of corporate environmental risks prompted the International Organization for Standardization (ISO) to establish a standard environmental management system template based on its successful quality management standard (ISO 9000). This system has widely acknowledged for including steps that identify, assess, analyze, and prioritize risks in a cyclical process designed to foster continual improvement. Accordingly, ISO 14000 has emerged as a useful overall framework for managing environmental risks. Companies using the ISO 14000 system have the opportunity to be registered by a third party as being ISO 14000 compliant and can then use this designation in their branding. Subsequent the legal case related to above, Noranda Forest decided to ensure that a management system approach was in place at each operation but noted that the ISO approach had the potential to be overly bureaucratic and time-consuming in some implementations. Furthermore, the benefits of registration were not universally accepted as useful owing to the time consumed and the expense. In the end, the choice of management system (homegrown or ISO) and registration (if ISO) was left to the operations themselves. Corporate policy dictated that “systematic environmental management” be implemented. Operations could choose ISO or modifications thereof or their own systems. Operations were monitored in their implementation of systematic management using a measurement tool specifically designed by the environment department for the purpose and reported quarterly to the board of directors. After management systems had been implemented, the company environmental audit system monitored their operation on a two- to three-year cycle and also reported it to the environmental committee of the board. Interestingly, most sites decided to use a modified ISO 14000 template, and few decided to be certified. At one of the sites that chose ISO 14000 registration, the manager, a man having a long and successful career in leadership, felt that certification was a useful discipline for the operation in the long term. He once commented, “I am more worried about losing a public certification than having the corporate office mad at me.”
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It is our experience that systematic environmental management systems are best put in place by line managers, meaning the people who manage the production facilities that carry the risks. They are best placed to understand the site’s environmental risks and to be able to establish the best solutions for their reduction. Whether it be a homegrown system such as Noranda’s oversight and audit system or an ISO template, so long as it is championed by senior corporate leadership and implemented by line and production managers, risk reductions should be achieved.
Approvals for Large Industrial Projects: The Environmental Risks Chapter 4 of this book describes the management of project risks, beginning after a project has been given permission to proceed. Obtaining environmental permits for large industrial projects to proceed, however, cannot be taken for granted as a perfunctory process leading to assured approval. There is often substantial risk that permits will be denied. It is usual for major permits for a large project, or even a relatively small project, to be finally adjudicated in the political realm, further increasing risk. Clear assessments of environmental and social risk for projects in the permitting phase are required to reduce these risks and to successfully acquire the permits necessary to operate. Minerals development projects are a case in point, for they follow a multistage path, including prospecting, exploration, and deposit delineation in the field. At that point, if there is the likelihood of a successful mine, the project moves toward environmental baseline studies, system design, permitting, construction, operation, and ultimately, closure and abandonment. At each stage financial resources must be acquired from investors or debt to advance the development of the project. Because of the high-risk nature of minerals projects, the industry has developed very detailed and sophisticated methods to evaluate, design, and assess projects so as to reduce risk to investors. A tremendous amount of effort is appropriately expended in delineating the area of the ore body during the exploration stage. This, along with very detailed engineering planning and design, is prepared so that financing can be acquired from investors or lenders who are comfortable with the geological, technical and financial risks of the project. Historically there has not been the same attention focused on the regulatory and social aspects of the project, and this has led to some significant difficulties. Acquiring the permissions to develop a project is an expensive and time-consuming activity that must be considered in the overall schedule, capital requirements, and design of a project. Typically in developed countries there exist regulations that require environmental assessments; licenses for exploration, production, and abandonment; and licensing to cover the uses of water for processing or waste discharge. In most countries these are subject to detailed evaluation, often in public fora, as well as to public input. These public processes afford a convenient avenue for public interest groups to provide input or opposition to a project. The level of public scrutiny on natural resource projects has grown in the face of large projects in remote areas and occasional spectacular failures, such as a major tailings dam failure at the Mount Polly mine in British Columbia on August 4, 2014.13,14
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Who Does What? Establishing an organizational structure that facilitates identification and mitigation of environmental risks necessitates attention at all levels of the company. Though it may not be absolutely necessary in smaller entities to have a dedicated department for the purpose, the responsibilities and actions need to be identified and delegated. In cases in which a corporate structure exists for several business units, leaders can consider implementing a corporate environmental management group. In any structured management system, it must be decided who does what. A guiding principle for developing this system is to have the decision making authority at the correct level of the organization for effective and efficient action.
Line versus Staff Roles Although the environmental role must be carried out by someone in the organization, the scale of the entity makes a difference in how this function might be organized. In small organizations with minimal environmental risk, line operating personnel can complete these tasks as a part of their regular job description. This could apply for example to a small manufacturer that generates a small amount of hazardous waste—for example, paint booth waste. Because there is typically a highly regulated process for handling, shipping, and disposing of this material, a production manager could carry out the function. In a large single manufacturing site or a medium-sized corporation having multiple sites, a dedicated environmental position is often preferable. In a single manufacturing facility, the role would be to carry out some of the functions but also serve as a source of new information on environmental risk from outside the company. The environmental position could be responsible for identifying risks and evaluating treatments to reduce them as well as having an operational role in managing a site waste management facility. In large organizations, or even small or medium-sized companies in some high-risk industries, a dedicated environmental staff operating at a corporate level will serve to assess the risks of the operations and the industry as a whole and bring these to the operation side of the business for consideration. A healthy dialogue between the staff and line personnel will ensure that operational personnel can bring issues forward while being open to those brought by the environmental staff. The operational personnel should take the lead in implementing the necessary changes in operations to address the identified risks, because they know their facilities and processes better than anyone else. It is appropriate for environmental personnel to bring possible solutions for consideration and to coach, and occasionally even cajole, operators over the magnitude of the risk and the need to find solutions. If an impasse is reached, then the matter should be moved to the next corporate level for consideration and resolution. It is important to see this as a normal course of events and not a negative reflection on either party. A systemized environmental management approach, such as ISO, can foster good relations in these situations. It is important that the environment department not be seen as a policing entity. Cooperation and joint objectives with operations are critical to the effective reduction of environmental risk. A policing demeanor on the part of environmental staff can lead to concealing important issues,
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which increases risk, confrontation, and in the event of an environmental failure, much acrimony and finger-pointing. This cooperative stance must be especially present in the environmental audit. Audits are an important aspect of providing assurance that management systems are functioning, but they should not be about catching someone out or inflicting maximum scrutiny on operations. The audit should be positioned and supported as a help to the site managers to continually improve their performance in measured and meaningful steps. Most audits generate a list of findings that need to be addressed. Our experience is that site managers are interested in improving their operations and find lists of things to do a helpful way to focus and delegate execution. This is especially true when they have the opportunity to schedule actions to meet their needs and even to contest findings with which they do not agree.
The Role of the Board of Directors and Senior Managers—Governance The direction from senior management and the board of directors is critical to successful environmental risk management. For the board, the governance role should be to ensure that there is a corporate policy on environmental matters that improves environmental performance and reduces the risk to the corporation and to the interests of the shareholders. With the guidance of senior environmental staff and possibly eternal experts, and with an understanding of the company’s environmental risks, the board can formulate a clear and concise policy. After this is done, the role should transition to monitoring the implementation of the policy and the quality of its operational results. Regular reports from management should demonstrate performance against achievement of the key environmental indicators and the objectives of the company. Indicators can be compliance measures, waste or emissions reduction objectives, or product initiatives. In some cases, the board may wish to install an environmental committee to more closely track some of the more technical or complex discussions necessary to set policy and evaluate progress. The role of the environment committee is not only risk reduction, but also to serve as a support to the executive team in culture building and policy setting. In other words, they aid in “directing” the company, not only protecting it from risks. Chapter 14 of this book discusses the role of the board of directors in risk management more generally.
Management Incentives It is important to make clear to management through their remuneration that environmental performance and risk management are important. Frequently there are discussions about whether variable compensation (in the form of a bonus) should be linked positively or negatively to compliance with environmental regulatory standards. (Chapter 13 of this book discusses in more depth risk culture and the role of incentive plans on shaping it.) Should a manager receive a bonus for improving the compliance frequency of facility air emissions—or is meeting this standard part of the job and therefore reimbursed within the bounds of salary compensation? Similarly, consider whether bonuses are provided to financial staff for not filing illegal or erroneous tax submissions to the government. It may be that the “improvement” of a poor situation is a bonus-worthy objective in a particular context and incentive framework—or it may not be. It all depends on the structure and philosophy of the compensation program.
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What is critically important is ensuring that achievement of environmental objectives is included in the variable compensation opportunities of relevant management (and other) personnel. Whether the KPIs in question are related to the reduction of risk or the improvement of environmental circumstances for the business, the increased acceptance of a company by stakeholders, supply chain management to reduce environmental footprint, or simply compliance with regulatory obligations, communicating their importance within the remuneration structure is good management.
The Importance of Corporate Culture—from the Board Room to the Shop Floor Much has been said and written about corporate culture and its importance in achieving results. Indeed, Chapter 13 of this book covers the topic. Once again, leadership is important to environmental culture. If leadership does not ask environmental performance questions of operations, then little emphasis will be perceived. Leaders must send messages to the employees that demonstrate their own commitment to good performance and their willingness to commit the company as well. Early in Noranda’s environmental management evolution, it was faced with a serious risk based on its contribution to acid rain degeneration of lakes and forests in the Canadian Shield. A senior leader of the company, after hearing the details of this risk, reportedly remarked, “We must not ruin the environment with acid rain.” That was a number of years ago and today a culture of environmental leadership is even more firmly installed in the new generation of corporate leaders. A generation of environmental regulation, media focus, societal reforms, and educational initiatives has raised the base knowledge and impetus for protecting and managing the environment. Thus many corporate environmental programs find fertile ground for implementation among the employees and leaders of today. However, companies are creations of humans, so continual vigilance is necessary to ensure that backsliding does not occur and that the great challenges of the present and future, such as climate change, resource depletion, and water quality are met by the creativity and focus that can be brought by corporations.
Notes 1. Polychlorinated biphenyls. 2. U.S. Environmental Protection Agency. Polychlorinated Biphenyls (PCBs): Health Effects of PCBs, www.epa.gov/ osw/hazard/tsd/pcbs/pubs/effects.htm. 3. Chlorofluorocarbons. 4. Claudia Cattaneo, “TransCanada in Eye of the Storm,” Financial Post (Toronto), September 8, 2011. 5. Peter Sandman, Responding to Community Outrage: Strategies for Effective Risk Communication. (Fairfax, VA: American Industrial Hygiene Association, 1996). 6. Editor’s note: This is an example of acceptable residual risks’ becoming new unacceptable risks, described in Chapter 1. 7. Pulp and Paper Mill Effluent Chlorinated Dioxins and Furans Regulations (SOR/92-267), Canadian Environmental Protection Act, 1999. 8. Ray C. Whittemore, LaFleur, L. E., Gillespie, W. J., Amendola, G. A., Helms, J., “USEPA/Paper Industry Cooperative Dioxin Study: The 104 Mill Study, Chemosphere, Vol. 20, Nos. 10–12 (1990): 1625–1632.
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9. U.S. EPA/Paper Industry Cooperative Dioxin Screening Study, Office of Water, Office of Water Regulations and Standards, Washington, DC, EPA-440/I-88-025. 10. New York State Department of Health, “Love Canal: A Special Report to the Governor and Legislature: April 1981” (2005), http://www.health.ny.gov/environmental/investigations/love_canal/lcreport.htm#history. 11. The Niagara Gazette, “Love Canal Chronology, 1984–1980.” http://library.buffalo.edu/libraries/specialcollections/ lovecanal/about/chronology.php. 12. Both authors of this chapter worked at the Noranda Group of Companies. 13. Imperial Metals, Inc., “Tailings Breach Information.” www.imperialmetals.com/s/Mt_Polley_Update. asp?ReportID=671041. 14. The Globe and Mail, “Waste Water from Central B.C. Mine Spills into Waterways, Prompting Water-Use Ban.” August 5, 2014, www.theglobeandmail.com/news/british-columbia/ water-use-ban-imposed-after-tailings-pond-breached-near-fraser-river/article19911069/.